A Public Works Boom in Japan Has Echoes From the Lost Decade

Work on an agricultural ditch in Saga, Japan. Public works contracts in Saga have risen for six straight months.Credit
Hiroko Tabuchi/The New York Times

SAGA, Japan — The bulldozers started up with a rumble this year in this bucolic corner of southern Japan, unleashing a construction frenzy — and a sinking feeling of déjà vu.

The traffic cones and “under construction” signs alongside Saga’s roads and waterways are about the only visible change brought about by “Abenomics,” Prime Minister Shinzo Abe’s much-lauded plan to put Japan back on the path to growth. Residents here say the building boom is a throwback to Japan’s troubled 1990s, when far-flung regions across the country tried to build their way back to prosperity.

And they worry that, like previous attempts, growth will not last.

“How long before all this winds down again? That’s what everyone’s worried about,” said Masataka Matsuo, a construction worker reinforcing an irrigation ditch several miles away from the city center.

Japan has been the world’s surprising growth story this year, largely outpacing other major industrialized countries with a bold set of policies that are lifting its economy after years of deflation. So far, it has been Mr. Abe’s bid to pump the nation’s banks with money — together with his promises of wide-ranging market reforms — that have garnered much of the investor spotlight.

But some economists say that Japan’s recovery has become dangerously dependent on large-scale public works spending, remembered here for adding to Japan’s debt burden, fueling pork-barrel politics and riddling the country with little-used roads, bridges and dams.

On Thursday, the government announced new stimulus spending of 5.5 trillion yen, much of it for public works, in a bid to offset any negative public reaction to a coming increase in a national sales tax.

Still, pouring money into infrastructure projects will do little to lift Japan’s growth potential in the long term, some economists warn. And with limited evidence that monetary easing is in fact lifting the real economy, growth “risks falling off a cliff” when government outlays sputter, said Chotaro Morita, chief strategist at SMBC Nikko Securities in Tokyo.

Recent figures seem to support this view. In the three months through September, consumer spending grew a mere 0.2 percent from the last quarter and capital investment was flat, despite the easy money available under Japan’s ultra-loose monetary policy. Net exports fell 0.6 percent.

Even the rise of the stock market — up almost 50 percent since the start of the year largely because exporters’ earnings are higher — has not helped average people spend more.

Instead, it has been government spending on public works that has lifted growth, expanding at a rapid clip of 6.5 percent from the previous quarter, the latest numbers show. Overall, growth for the quarter was revised to just 0.3 percent from the previous three months, down from an initial reading of 0.5 percent.

“Japan’s growth engine has been massive government spending,” Ryutaro Kono, economist for BNP Paribas, said in a recent note.

Saga, a small prefecture of about 850,000 people, knows all about government largess. Construction was abundant here during the Lost Decade 1990s, as Japan sought to fend off recession with a huge public works drive that in some years topped the entire military budget of the United States.

Saga built a new airport, dammed nearly all its river systems, and opened a 200-acre landscaped park with a shiny visitor center and almost 100 historical buildings. At the peak of the building frenzy, one in nine workers in Saga worked in construction.

Photo

Prime Minister Shinzo AbeCredit
Pool photo by Yoshikazu Tsuno

But from the early 2000s, a reformist prime minister started to reduce spending, leaving regions like Saga in the lurch. The Democratic Party, which took the country’s helm in 2009, declared that Japan would further shift its resources “from concrete to people.” By 2012, public investment had declined to a third of its peak in 1998. Almost a fifth of Saga’s construction companies closed or went out of business. The local economy plummeted.

Mr. Abe, who led the Liberal Democratic Party to victory last December, has again turned on the spigot. Barely two weeks after he took office, Mr. Abe announced a ¥10 trillion (over $110 billion) emergency stimulus package centered on public works.

Within days, Saga’s prefectural assembly passed a ¥28 billion stimulus package of its own, four-fifths of which went to infrastructure projects. The runway at Saga’s airport must be repaved, lawmakers said, and roads extended. The prefecture even began to upgrade its Japanese-style public toilets to Western-style ones.

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Public works contracts in Saga have risen for six straight months. The prefecture scrambled to hire 47 temporary employees just to handle the extra tenders. Nationally, public works projects are at their highest level in a decade, with almost ¥4 trillion spent in the first three quarters.

“If a road serves even one person, it serves an important purpose,” said Masatoshi Inadomi, a Liberal Democratic lawmaker in Saga’s prefectural assembly.

Still, with no guarantee the spending bonanza will continue, even construction companies are hesitant to ramp up hiring or investment. A growing number of public construction projects are finding no bidders because of a shortage of workers and machinery.

“There’s lots of work, but it’s too risky to start expanding again. Government is so fickle,” said Tsuyoshi Kishimoto, president of Kishimoto Gumi, one of Saga’s biggest contractors.

This fiscal wheel-spinning would not be as much a concern if the other Abenomics policies were wielding a wider effect. But here in Saga, there are few signs the easy money is being put to good use. Lending at the Bank of Saga, the region’s biggest lender, “has been largely flat this year” with little signs of a pickup in demand for funds, said Takanori Nishikubo, a bank spokesman.

Nor are consumers here starting to spend, and for good reason. Saga’s ratio of job offers to job-seekers, a crucial employment measure, continued to stagnate at 0.77 in September. An almost 20 percent jump in construction jobs was not enough to offset a loss of jobs in other sectors, according to the local government. With a tepid labor market, wages have also remained stagnant, as have consumer prices, because of weak demand, according to a November report released by the Fukuoka branch of the Bank of Japan.

Mitsuko Maruko, who has run an electronics store in Saga for almost four decades, says she follows the upbeat news on Abenomics but sees no uptick in her own business. Her small store is one of the few retailers still doing business in her hamlet, Iwaya; many young people have left. She said she could not think of expanding or hiring outside help. Sales have been on a near-constant decline for the last two decades.

“Absolutely nothing has changed,” Ms. Maruko said.

Still, in Saga’s Karatsu city, there is a bid to harness another aspect of Mr. Abe’s economic growth plan: cutting the red tape that inhibits businesses from starting or growing.

Led by Bloom, a local company that conducts testing on imported cosmetics, a regional project is seeking to bring farmers and workshops together to produce cosmetics and perfumes.

Karatsu has earmarked about ¥10 million for the project so far, a pittance compared with the billions of yen going to construction. The hub is pushing for Saga to be named one of the government’s new “special economic zones,” a designation that could bring favorable tax rates, looser restrictions on hiring and firing, and other business-friendly measures.

Saga officials say they have especially high hopes of revamping the agricultural sector by getting local farmers to grow valuable cosmetic ingredients, like traditional herbs.

“The idea is to create something new in Saga,” said Shinji Yamasaki, Bloom’s chief executive. “For growth, you need new ideas.”

A version of this article appears in print on December 9, 2013, on Page B3 of the New York edition with the headline: A Public Works Boom in Japan Has Echoes From the Lost Decade. Order Reprints|Today's Paper|Subscribe